Former bank official who was removed from his positions as director and acting chief executive officer of the bank for violations of federal regulations, and who retained a present shareholder interest in the bank, was prohibited from participating in the affairs of the bank. The prohibition extends to the voting of present stock ownership because of concerns that former bank official's participation may pose a threat to the interests of the bank's depositors and may threaten to impair public confidence in the bank.

[.1]Prohibition, Removal, or SuspensionCriminal Conviction
Falsehood, the filing of false statements, the fabrication of records, and the circumvention of currency transaction regulations designed to prevent the "laundering" of money obtained from illegal or criminal activities, are precisely the kinds of alleged offenses of the gravest concern to banking regulators such as the FDIC and the Financial Institutions of a state. Offenses of this type threaten the integrity of banks and the banking system. They inevitably pose the potential for injury to the interests of depositors and the impairment of public confidence in the banking system.

{{4-1-90 p.A-310}}[.2]Change in Bank Control ActCompliance
Under the Change in Bank Control Act, ownership of 5 percent is presumptively a control amount.

[.3]Removal, Prohibition, or SuspensionThreat to Depositors
The public must have confidence in the integrity of banks and those exercising influence in their management. Bank customers and the general public must be able to view those exercising influence in the management of banks as trustworthy, without perceived identification to crime or criminal elements.

IT IS ORDERED, for the reasons stated in the Recommended Decision of Presiding Officer Daniel H. Hanscom, which is incorporated herein by reference, that the Notice of Prohibition issued by the Board of Directors of the Federal Deposit Insurance Corporation against * * *, pursuant to section 8(g) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(g)), on April 27, 1984, be, and hereby is, continued in effect until terminated by the Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, D.C., this 17th day of September, 1984.
/s/ Hoyle L. Robinson
Executive Secretary

BEFORE THEFEDERAL DEPOSIT INSURANCECORPORATION

Hearing under § 308.59 of the FDIC's Rules and Regulations pursuant to the request of * * *, former member of the board of directors, former acting chief executive officer, and present stockholder of * * * Bank of * * *, that the Notice of Prohibition issued April 27, 1984, under Section 8(g)(1) of the Act be rescinded or withdrawn.

RECOMMENDED DECISION

On June 11, 1984 and July 1820, 1984, a hearing was held under Section 308.59 of the FDIC's Rules and Regulations on the written request filed by * * *, former member of the board of directors, former acting chief executive officer, and present stockholder of the * * * Bank of * * * ("* * * bank"), * * *, that the Notice of Prohibition issued to him under Section 8(g)(1) of the Act be rescinded or withdrawn.
On July 13, 1983, Mr. * * * was indicted by a Federal Grand Jury in the United States District Court for the District of * * *. The indictment was in three (3) counts and charged offenses relating to alleged illegal currency transactions, to-wit: conspiracy in violation of 18 U.S.C. § 371, conspiracy to violate and violation of 31 U.S.C. §§ 5313 and 5322, the making of false and fraudulent statements in violation of of 18 U.S.C. § 1001, and the violation of Federal Regulations § 103.22, Reports of Current Transactions of § 103.25, Filing of Reports.
As a result of the indictment on July 20, 1983, Mr. * * * was removed from his position as acting chief executive officer and director of the bank (FDIC Ex. 2, pp. A-1, B through B-2). Mr. * * *, however, continued as a stockholder, owning 7.3 percent of the stock of the * * * bank (Respondent's Ex. 9, p. 8). Indicted with Mr. * * * were Mr. * * *, chairman of the board of directors and also owner of about 8 percent of the bank's stock, * * *, cashier, and the * * * Bank of * * * itself. Both Mr. * * * and the * * * bank subsequently pleaded guilty. Mr. * * * received a suspended, sentence, and the bank was fined $125,000, $95,000 of which was suspended, in addition apparently to making certain commitments regarding its future conduct (FDIC Ex. 7).
On April 27, 1984, a Notice of Prohibition was issued by the FDIC to both Mr. * * * and Mr. * * * prohibiting them from participating in any manner in the conduct of the affairs of the * * * bank. In effect, this Notice prevented Mr. * * * and Mr. * * * from using their ownership of stock to participate in or influence the affairs of the * * * bank since both had been removed from their positions in the bank on July 20, 1983 (see, 12 U.S.C. § 1818(j)).

On May 10 and May 16, 1984, counsel for Mr. * * * and Mr. * * * filed written requests for a hearing for each pursuant to 12 C.F.R. § 308.59, and demanded certain prehearing discovery and relief. On May 23, 1984, counsel for Mr. * * * and Mr. * * * wrote the FDIC's Assistant Executive Secretary that he was committed to try a case in the U.S. District Court, * * *, commencing June 5, 1984, and that this trial might continue into the following week and compel him to seek a postponement of the hearing then tentatively set for June 11. On May 25, 1984, the undersigned was appointed presiding officer and the agency scheduled a joint hearing June 11, 1984, in * * *. The hearing was set for June 11, 1984, to comply with the requirements of § 308.61 of the FDIC Rules and Regulations that the hearing be held within 30 days following the written request.
In his May 10 and May 16, 1984, requests for a hearing for Mr. * * * and Mr. * * *, a corrected first page being substituted on Mr. * * *'s request on May 23, counsel for Mr. * * * and Mr. * * * demanded the following relief:

"Recision or withdrawal of the notice of prohibition;
"An evidentiary hearing before an administrative law judge to determine the nature, extent, source and effect of any and all ex parte communications or other approaches that may have been made to any member, director, employee, agent or representative of the FDIC by representatives of * * * Bank or its officers or directors, or representatives of the U.S. Attorney, or the State of * * *, for the purpose of disclosing whether any improper influence tainted the FDIC's decisionmaking processes in this matter. Patco v. FLRA, 672 F2d 109 (D.C. Cir. 1982);

"A determination of how Mr. * * *'s participation in the affairs of * * * Bank of * * * as a stockholder constitutes a threat to the Bank's depositors or will impair the public's confidence in the Bank;

"A determination of how the purpose of 12 USC § 1818(g) is furthered and served by the issuance of a Notice of Prohibition to Mr. * * *; (Feinberg v. FDIC, 420 F. Supp. 109 (D.D.C. 1976)."

Counsel for the FDIC opposed these demands by letter of May 31, 1984. On June 4, 1984, counsel for Mr. * * * and Mr. * * * filed with the undersigned a request for subpoenas ad testificandum and duces tecum to implement the demands for relief set out earlier herein (marked Hearing Exhibits A through C).. Additionally, counsel also filed with the undersigned a Memorandum Re Burden of Proof which has been marked Hearing Exhibit D.
A prehearing conference was held by telephone on June 7, 1984, at which the various prehearing demands of counsel for Mr. * * * and Mr. * * * were considered and argued. The undersigned denied the prehearing demands and refused to issue the subpoenas. Counsel for the FDIC, however, was directed to provide counsel for Mr. * * * and Mr. * * * with certain information relative to deposits and withdrawals from the * * * bank.
The hearing was convened June 11, 1984, in the * * * Federal Court House, as scheduled. At the commencement of the hearing, the undersigned stated on the record the basis for his prehearing ruling on the discovery demands of counsel for Mr. * * * and Mr. * * * inasmuch as the prehearing conference by telephone was not recorded. Thereafter, Mr. * * * and Mr. * * * presented their case through counsel and rested.
Counsel for the FDIC then commenced the case in support of the Notice of Prohibition issued to Mr. * * * and to Mr. * * *. By early evening, it was apparent that the hearing could not be completed June 11. Counsel for Mr. * * * and Mr. * * * could not continue the hearing the following day or on any day during the rest of the week of June 11 because of the trial he was conducting in * * *, mentioned earlier. Counsel for the FDIC could not continue the case the following week because of other scheduled commitments. The hearing could not be held during the two weeks following June 25, 1984, because both Mr. * * * and Mr. * * * were scheduled to be tried on their criminal charges during that period. Accordingly, the undersigned set the hearing to continue on July 9, the earliest possible date.
Late in the day on July 6, 1984, the presiding officer was telephoned by counsel for Mr. * * * and Mr. * * *, FDIC coun-
{{4-1-90 p.A-312}}sel also being on the line, and was advised that Mr. * * * had been acquitted and Mr. * * * had been convicted. Counsel stated that a continuation of the proceeding on July 9, 1984, with respect to Mr. * * * appeared to be moot as a consequence of his acquittal, and that Mr. * * * requested that the July 9 hearing with respect to him be postponed for a short while so that he could assess his position in view of his conviction. Counsel for the FDIC had no objection, so the July 9 hearing was rescheduled for July 18, 1984. Due to the impending * * *, it was decided to hold the hearing on July 18 in a location other than * * *. Counsel for the FDIC did not wish the hearing to be held in * * *, so * * *, was selected instead.
The hearing was commenced as scheduled on July 18 in * * *, in the Federal Court House. It lasted three days and concluded Friday afternoon, July 20, 1984. At the request of counsel, the record was ordered to be kept open until July 27, 1984, in accordance with § 308.61(g) of the FDIC Rules and Regulations. The transcript was scheduled for filing August 1, 1984. Both counsel for Mr. * * * and FDIC counsel had trials scheduled in August and wanted this taken into consideration in fixing a date for the filing of briefs. Accordingly, and also in consideration of the fact that this hearing developed a fairly extensive record, the undersigned provided that counsel for Mr. * * * and counsel for FDIC could each file a concise statement of their respective positions, and what they believed the evidence established, no later than August 31, 1984, and that short replies could be filed five days later. The transcript of the hearing numbers 849 pages. FDIC counsel introduced 20 exhibits and counsel for Mr. * * * and Mr. * * * introduced 10 exhibits. Most of these exhibits consist of multiple pages. FDIC Exhibit 19 is a corrected first page of FDIC Exhibit 12. FDIC Exhibit 20 was produced on demand of counsel for Mr. * * * and consists of State of * * *, Financial Institutions Division, records of deposits shown on the * * * bank's Daily Report from July 13, 1983 (when Mr. * * * was indicted) to September 30, 1983 and from July 6, 1984 (the date he was convicted) through July 18, 1984. FDIC Exhibits 19 and 20 were submitted and became part of the record after the completion of hearings in * * *, on July 20, during the five day period, the record was kept open.

The Indictment

Mr. * * *, as stated, was in dicted by a Federal grand Jury in the United States District Court for the District of * * *. The indictment reputedly and from a "sting" operation conducted by the IRS to uncover money laundering operations (see * * *, Tr. 310, 323; FDIC Ex. 14; FDIC Ex. 1, pp. 23; and FDIC Ex. 11). Mr. * * * was convicted on July 6, 1984. At the hearings commencing July 18, 1984, counsel for Mr. * * * stated that he was appealing his conviction and was also seeking a new trial (Tr. 250; see also FDIC Ex. 11, p. 11).
The indictment (FDIC Ex., pp. 411) charged the * * * bank, * * *, * * *, and * * * with Count I (Conspiracy), Count II (Failure to File Currency Transaction Reports; Aiding and Abetting), and Count III (False Statements; Aiding and Abetting).
More specifically, Count I of the Indictment charged Mr. * * *, in conspiracy with the others named, with knowingly and willfully failing to timely file currency transaction reports with the IRS and with filing a false and fraudulent report identifying one "* * * from * * *, * * *" as the depositor of $135,000 when he well knew the said $135,000 was deposited by a person identified to and known by him as "* * *." According to the Indictment, "* * *" in reality was a Special Agent of the IRS. Among the overt acts alleged under Count I were the receipt by Mr. * * *, in concert with the others named, of $90,000 from " * * *," which was deposited in the * * * Bank in a fictitious account under the name "* * *"; the receipt of $90,000 which was allegedly placed in the bottom drawer of a file cabinet at the bank; the acceptance of $135,000 from "* * *"; the alleged transfer of $180,000 from the fictitious accounts of "* * *" and "* * *," at the bank to the * * * National Bank in * * *; and the alleged report by Mr. * * * to "* * *" that bank examiners had asked a lot of questions about cash transactions, but they had "weathered the storm all right."
Count II of the Indictment alleged that Mr. * * *, with the others named, had knowingly and willfully failed to timely file Currency Transaction Reports with the IRS as part of a pattern of illegal activity involving transactions of more than $100,000 in
{{4-1-90 p.A-313}}violation of the U.S. Code of Federal Regulations, specifically, failure to file reports for cash deposits of $70,000, $90,000, and $135,000, and a withdrawal of $100,000 in the approximately two week period between December 22, 1982 and January 6, 1983.
Count III charged Mr. * * *, with the others named, with knowingly and willfully submitting a false and fraudulent Currency Transaction Report to the IRS, which identified "* * * from * * *", as the depositor of $135,000 at the * * * bank pursuant to "Repurchase Agreement #17" when Mr. * * * well knew the $135,000 was deposited by "* * *", secretly a Special Agent of the IRS as stated.
The Indictment charged a violation of 18 U.S.C. § 371 and § 1001, 31 U.S.C. §§ 5313 and 5322, Sections 103.22 and 103.25 of Federal Regulations, and 18 U.S.C. § 2.
31 U.S.C. § 5313 compels financial institutions to report currency transactions over a certain amount as prescribed by Federal Regulation Section 103.22 of 31 C.F.R., which sets the amount at $10,000 and prescribes the Currency Transaction Report form to be filed. Section 103.25 of 31 C.F.R. provides that Currency Transaction Reports shall be filed by the financial institution within a specified number of days of their occurrence with the Commissioner of Internal Revenue. 31 U.S.C. § 5322 provides criminal penalties for a violation of 31 U.S.C. § 5313, and 31 C.F.R. §§ 103.22 and 103.25. As part of a "pattern of illegal activity involving transactions of more than $100,000 in a 12-month period," the punishment is set at a fine of "not more than $500,000, imprisonment for not more than 5 years, or both."
18 U.S.C. § 1001 makes it a Federal crime to knowingly or willfully falsify or make any false or fraudulent statement in any matter within the jurisdiction of any department or agency of the United States and prescribes the punishment therefor to be a fine of not more than $10,000 or imprisonment of not more than 5 years, or both.
18 U.S.C. § 2 provides that anyone who "aids, abets, counsels, commands, induces or procures" the commission of an offense against the United States is punishable as a principal, and 18 U.S.C. § 371 makes it a Federal crime to conspire to commit an offense against the United States or any agency thereof in any manner or for any purpose, punishable by a fine of $10,000 or imprisonment for 5 years, or both.

Statutory criteria

Section 8(g)(1) of the FDI Act states that whenever any officer or director, or other person participating in the conduct of the affairs of a bank, such as Mr. * * *, is charged with the commission of a crime involving dishonesty or breach of trust punishable by imprisonment for a term exceeding one year under Federal law, the FDIC may prohibit such person from participating in any manner in the conduct of the affairs of the bank if such participation "may pose a threat to the interests of the bank's depositors or may threaten or impair public confidence in the bank."Mr. * * *'s contentions that the Notice of Prohibition should be withdrawn or rescinded
Mr. * * * has been removed from his position as a director and acting chief executive officer of the * * * Bank of * * *, but continues to own 7.3 percent of the bank's stock. Mr. * * * seeks to vote his shares and maintains that voting his 7.3 percent stock ownership does not pose a threat to the depositors and does not threaten to impair public confidence in the bank. As stated, Mr. * * * introduced 10 exhibits and called two witness in rebuttal. Otherwise, Mr. * * * based his case upon questioning of the witnesses called by the FDIC staff and rebuttal of documents introduced through such witnesses.
Respondent's exhibits 1 through 8 consist of * * * financial statements on the * * * Bank of * * * (Exhibits 1 through 3), financial records of the FDIC "Call Reports" (Exhibits 4 through 7), and the bank's month-end Statements of Condition for December 1983 through March 1984 (Exhibit 8). In addition to extensive other financial data, these records show the course of deposits in the * * * bank before and subsequent to Mr. * * *'s indictment on June 13, 1983. The financial statements of * * * show the following:
December 31, 1982 (Respondent's Ex. 3, p. 3).

The unaudited * * * report for December 31, 1982, showed some difference in Demand and Time deposits from the foregoing figures, but the total is the same (see Respondent's Ex. 1, p. 3 and compare with Respondent's Ex. 3, p. 3).
FDIC figures ("Call Reports") show the following:
June 30, 1983 (Respondent's Ex. 4, p. 7).

Total Deposits

$8,567,000

Demand

$2,636,000

Time/Savings

5,931,000

September 30, 1983 (Respondent's Ex. 7, p. 4).

Deposits

$8,514,000

Demand

$2,429,000

Time/Savings

6,085,000

December 30, 1983 (Respondent's Ex. 5, p.6).

Total Deposits

$8,908,000

Demand

$3,080,000

Time/Savings

5,828,000

March 31, 1984 (Respondent's Ex. 6, p. 9).

Deposits

$8,665,000

Noninterest-

bearing

$2,882,000

Interest-

bearing

5,783,000

The bank's statement of condition show (Respondent's Ex. 8):

December 30, 1983

Total Deposits

$8,907,668

January 31, 1984

Total Deposits

9,054,463

February 29, 1984

Total Deposits

8,933,797

March 30, 1984

Total Deposits

8,664,625

April 30, 1984

Total Deposits

7,967,600

Comparison of these various figures for deposits, demand, time, and comparable categories shows fluctuations, but no declines which can be directly related to the indictments on July 13, 1983, and the following events. Total deposits were about the same on September 30, 1983, $8,514,000, as they were just before the indictments on July 13, 1983, $8,552,161. And on December 31, 1983, total deposits were higher by about $335,000 than they were June 30, 1983. By January 31, 1984, deposits were higher by about $500,000 than they were June 30, 1983, and by March 30, 1984, they were again about the same. No significant growth, however, is indicated.
Although these records of deposits do not reveal what effects there may have been on deposits in the several days immediately following the "raid" on the * * * bank (see * * *, Tr. 310, 323, * * *, Tr. 495; FDIC Ex. 14) by the IRS on July 13, 1983, they do not show any long-term sustained runoff of bank deposits or any apparent long-term deterioration in its financial position from the standpoint of its gross level of deposits. These broad deposit figures, nevertheless, do not negate the possibility that there could have been an unusual withdrawal of deposits by customers following the indictments, and that the loss of these deposits was compensated for by deposit of funds obtained from other sources such as officers, directors, or stockholders (see, e.g., FDIC Ex. 12, p. 2).
After introducing the financial records of the bank, counsel for Mr. * * * asserted that the "figures absolutely refute the suggestion that there was a run on the bank" (Tr. 30) and rested Mr. * * *'s showing (Tr. 33). Some additional evidence, however, was offered by counsel for Mr. * * * on rebuttal which is discussed later in this recommended decision.

Evidence offered by the FDIC staff

At the June 11, 1984, hearing, FDIC staff called two witnesses: * * *, an FDIC bank examiner, and * * *, administrator of * * *'s Financial Institutions Division. The testimony of the latter could not be completed, however, and he resumed his testimony when the hearing reconvened on July 18.
Mr. * * * is an experienced bank examiner. He made a visitation to the * * * bank on July 14, 1983, at the instruction of the FDIC Assistant Regional Director as a result of the indictments the preceding evening of Mr. * * *, Mr. * * *, Mr. * * *, and the bank, to determine its condition. Mr. * * * and Mr. * * * were not at the bank but had been arrested (Tr. 323). At the bank on the morning of July 14, officers were meeting with customers and receiving phone calls "to discuss the situation and they were advising them of their perception of the conditions of the bank" (Tr. 51). Mr. * * * had found from his examination a
{{4-1-90 p.A-315}}reasonable level of liquidity (Tr. 49). The report of his visitation to the bank on July 14 is in the record (FDIC Ex. 1, p. 1), and the Press Release of the U.S. Attorney for the District of * * * relating to the search warrant executed at the * * * bank on the evening of July 13, 1983, and the indictment of the bank and * * *, Mr. * * *, and Mr. * * * is also in the record (FDIC Ex. 1, pp. 2-3). There was considerable publicity in * * * newspapers relating to these events (FDIC Ex. 1, p. 16, FDIC Ex. 14). Mr. * * * forwarded the newspaper clippings to the FDIC Regional Office (Tr. 66).
In the ensuing weeks, Mr. * * * conducted a full-scale examination of the bank jointly with examiners of * * *. His report was received in evidence as FDIC Ex. 2. As a result of his examination, Mr. * * * gave the * * * bank a composite rating of "3" under the Uniform Bank Rating System, indicating "a combination of financial or operational weaknesses ranging from moderately severe to unsatisfactory" (FDIC Ex. 2, p. 1-a-2; see FDIC Ex. 13 and * * *, Tr. 564-66). Certain assets were adversely classified, mostly loans (FDIC Ex. 1, pp. 1 and Pink Sheet A), and the bank's liquidity position was considered week (FDIC Ex. 2, pp. 5 and Pink Sheet A-2).
Overall, Mr. * * * considered the * * * bank's condition "unsatisfactory, with a definite downward trend" (FDIC Ex. 2, Pink Sheet A-2). He attributed the bank's problems primarily to Mr. * * * and Mr. * * * writing:

"...* * * was responsible for many of the newly extended and classified loans, as well as the generally lax and undesirable lending practices identified. * * * and * * * were the dominant individuals in the bank and are considered primarily responsible for the bulk of the problems identified on pages 1."
(FDIC Ex. 2, Pink Sheet A-1; see also pages 1 through 1-a-2).

On cross-examination, counsel for Mr. * * * brought out that some of the adversely classified loans may have been approved before Mr. * * * became chief executive officer in January 1983 (Tr. 145-154). However, before assuming that position, he was vice chairman of the board (Tr. 179) and, as such, had a share of responsibility for the conduct of the bank's business (Tr. 175-6).
* * * was called by FDIC staff. He is the administrator of the Financial Institutions Division of * * * and is a thoroughly experienced bank examiner and supervisor of bank operations (Tr. 184-90). Mr. * * * was ordered by his superior to fly to * * * and inquire into the situation of the * * * bank and monitor its activities the day following the execution of the IRS search warrant on the evening of July 13, 1984 (Tr. 190-91; FDIC Ex. 1, pp. 2, 1617; FDIC 14).
Mr. * * * met with the bank's auditors, * * *, with the bank's officers and directors, except for Mr. * * * and Mr. * * *, and initiated a special examination of the bank to determine whether it should be allowed to stay open or whether to take appropriate regulatory action to put it into receivership (Tr. 194-96). Additionally, Mr. * * * stationed a * * * representative in the bank on a daily basis to monitor its activities (Tr. 197). Mr. * * * was concerned over a possible run on the bank (Tr. 199). In the next several days, study of the bank convinced Mr. * * * and his associates that the bank could stay open safely and, through a press release and other actions, reassured the public of the bank's essential solvency and that the depositors' money was being protected (Tr. 200; Tr. 327).
Mr. * * * also informed the public of the removal of Mr. * * * and Mr. * * * as officers and directors of the bank to indicate "that these two individuals, while under indictment, were no longer associated with the affairs of the bank" (Tr. 203). Around August 25, 1983, Mr. * * * and Mr. * * * were alleged to have been visiting the bank and going into areas not accessible to the general public (Tr. 209). Accordingly, the Financial Institutions Division issued orders prohibiting the * * * bank from permitting Mr. * * * or Mr. * * * to enter areas of the bank not open to the public or from remaining on or about bank premises longer than necessary to transact ordinary customer business until the criminal charges against them were resolved in their favor (FDIC Ex.3, Tr. 211-12; FDIC Ex. 6; Tr. 214, 256-57). Subsequently, in October 1983, Mr. * * * and Mr. * * * were reported to be soliciting proxies (Tr. 216, 269-71) and, as a consequence, Mr. * * * and the Financial Institutions Division issued additional orders, October 18 and 20, prohibit-
{{4-1-90 p.A-316}}ing them from participating or attempting to participate in the affairs of the bank "in any manner, shape or form" (FDIC Ex. 4 and 5; see Tr. 217-18).
Thereafter, on December 2, 1983, after the * * * bank had pleaded guilty to one count on the charges in the indictment (Tr. 257-58) as a result of a plea bargain (FDIC 7), Mr. * * * and the Financial Institutions Division determined that an order should be issued subjecting all persons owning 10 percent or more of the bank's stock, and all officers, directors, or other managerial officials to a re-examination by the State of * * * (FDIC Ex. 8; Tr. 262).
On May 9, 1984, Mr. * * *, believing that the prior * * * orders were not being complied with, filed a complaint for injunctive relief in the * * * district court (FDIC Ex. 9, Tr. 271-74). This complaint, however, was dismissed on July 6, 1984, for failure to state a claim upon which relief could be granted (FDIC Ex. 10).
As an expert bank examiner and an expert with respect to bank operations, Mr. * * * stated his opinion that "there may be a probability that Mr. * * *'s continued involvement with the bank could lead to an impairment of public confidence" (Tr. 287-88).
It appeared from questions by counsel for Mr. * * * that the Financial Institutions Division of * * * had monitored deposits in the * * * bank on a daily basis following the IRS's execution of a search warrant on the evening of July 13, 1983 (Tr. 327-32). Counsel for Mr. * * * demanded production of these records from July 13 to August 12, 1983 (Tr. 302-03; Tr. 328-32), and the presiding officer so ordered. They were produced during the period the record was kept open following the * * * hearings and were placed in the record as FDIC Ex. 20.
Under questioning by counsel for Mr. * * *, Mr. * * * testified that very shortly after the indictment of Mr. * * * and Mr. * * *, he attended a meeting in the U.S. Attorney's office in * * * which included representatives of the IRS (Tr. 309). The subject of narcotics was mentioned by the U.S. Attorney and the prosecutor-in-charge, * * * Task Force, and they "raised the specter allegation that the laundering of monies through this bank [* * * Bank of * * *] or other banks in * * * could involve the laundering of narcotics money" that "they were in essence issuing warning to our office that this activity had taken or could take place in the future" and "that this would not be the only instance of such IRS activity," i.e., the purporting sting operation that involved the ultimate arrest of Mr. * * * and Mr. * * * (Tr. 310-11; Tr. 320).
Mr. * * * was concerned as an official of the State of * * * that from a public perception point of view confidence would be eroded by disclosure of money laundering activities (Tr. 312-15).
Under questioning by counsel for Mr. * * *, Mr. * * * testified that he had read newspaper reports where the U.S. Attorney and the Attorney-in-Charge, * * * Task Force, were reported to have stated that "there had been narcotics activity by either Mr. * * * or Mr. * * *" (Tr. 316).
Later in the Spring of 1984, Mr. * * * discussed with FDIC staff the actions being taken by * * * and the FDIC relative to the * * * bank (Tr. 347-50), the "action by Mr. * * * and Mr. * * * to either vote their own shares or to vote proxies that were solicited on their behalf or other shareholders at a special shareholders meeting" (Tr. 353), and the attempt by a "faction headed by Mr. * * * and Mr. * * * to hold a special shareholders meeting" (Tr. 351; see Tr. 347-66). According to Mr. * * *, "this group of shareholders had entered the bank during banking hours and created a commotion of spectacle" (Tr. 359). Mr. * * * took action and issued orders as administrator on the Financial Institutions Division of * * * to prevent Mr. * * * and Mr. * * * in conjunction "with the other proxies" from holding a "rump" shareholders meeting (Tr. 368) and "trying to put together a take-over group" (Tr. 371).
Mr. * * * refused to agree that the mere voting of his 7.3 percent stock ownership by Mr. * * * would not have the potential for eroding public confidence in the bank (Tr. 371-373). He testified that "[t]he conjecture on a worst case basis would be that the public would become aware of it through the media and have an adverse reaction to the fact that someone who is convicted of a breach of trust as a result of an activity within the bank, they would have an adverse reaction" (Tr. 374). Mr. * * * testified the public "would say, I don't want to do banking business with this particular firm [which] allows this individual to continue to participate through the voting of
{{4-1-90 p.A-317}}shares in the activities of the bank. Some people may have an adverse opinion to that. They may withdraw their money. That could have a detrimental effect. I have to look at the worst case" (Tr. 374-75). Mr. * * * stated under questioning by counsel for Mr. * * * that he felt there would be a prejudicial effect on the bank if Mr. * * * were to become an officer or director of the bank while his conviction was in effect (Tr. 381-82).
Mr. * * *, the current president of the * * *, appeared as a witness and produced a compilation of statistics for the three-month period following the July 13, 1983, IRS search of bank records and the arrest and indictment of Mr. * * * and Mr. * * * which purported to show a significant runoff of deposits and accounts generally, FDIC Ex. 12. The validity of these figures came under substantial attack by counsel for Mr. * * * in the questioning of Mr. * * * and the testimony of Mr. * * * and Mr. * * * on rebuttal.
Mr. * * *, Regional Director of the * * * office of FDIC, testified concerning the Uniform Bank Rating System (FDIC Ex. 13), which was used by Mr. * * * in examining the * * * bank (FDIC Ex. 2), and concerning the circumstances surrounding the recommendation by the * * * Regional Office that a Notice of Prohibition be issued respecting Mr. * * * and Mr. * * *. According to Mr. * * *, at the time of the examination of the * * * bank in August 1983, "[a]lmost 100 percent of the assets in relation to capital was subject to adverse classification. We had a chaotic management situation in that the acting chief executive officer [Mr. * * *] had been indicted and had been incarcerated for some time. We had the public, press documents, the articles which had appeared, the various lawsuits related to disputes. The file was quite voluminous" (Tr. 570).
Around the middle of January 1984, Mr. * * * determined to recommend Section 8(g) action against Mr. * * * and Mr. * * * (Tr. 576). In making this decision, he considered the examination of the bank in August 1983, the adverse publicity relating to the bank, the indictments, the actions of the State of * * *, the proxy solicitations on behalf of Mr. * * *, the failure of an attorney associated with Mr. * * * to respond to an inquiry by the * * * Regional Office in December 1983 relating to the Change in Bank Control Act (See FDIC Ex. 16), and other circumstances (Tr. 576-77). FDIC Ex. 15, pp. 1 through 65 was received for the purpose of showing what Mr. * * * did in recommending Section 8(g) action to FDIC headquarters respecting Mr. * * * and Mr. * * * and the documents and materials which came to his attention (Tr. 587-92).
Mr. * * * did not initiate a Section 8(g) recommendation to FDIC headquarters in 1983, following the indictments of Mr. * * * and Mr. * * * on July 13, 1983, because Mr. * * * and Mr. * * * had been suspended by the bank of their duties as officers and directors, and outstanding * * * orders prevented them from reassuming these functions or participating in any manner in the affairs of the bank (Tr. 598, 603-04, 627, 631-34).
In late 1983 and early 1984, Mr. * * * came to believe that these State of * * * orders were being violated by solicitations of proxies by Mr. * * * and Mr. * * * and that FDIC action was required (Tr. 597-99). Mr. * * * testified that the presence of Mr. * * * as a voting stockholder in the * * * bank, in his opinion, would impair public confidence and could be injurious to the bank's depositors (Tr. 595). Mr. * * * testified that there were 150 shareholders in the * * * bank, that Mr. * * * owned about 7 percent of the stock, and that if he voted his shares, in Mr. * * *'s opinion, the public would find out that fact (Tr. 648-52).Rebuttal by Mr. * * *
* * *, a director of the * * * bank at the time of the IRS action on the evening of July 13, 1983 (Tr. 495), attended an emergency meeting of bank directors immediately following. All directors, except Mr. * * * and Mr. * * *, were present. Mr. * * * recounted that all present were concerned about a possible run on the bank the following day, July 14, and that extensive preparations were made, including reports to be submitted by the bank's operating officer in charge on an hourly basis, the lining-up of other banks to supply funds, if needed, the stationing of officers and directors in the bank lobby to answer questions and to reassure depositors, the provision of security in case the bank floor became overcrowded, and the obtaining of the presence of an official of the State of * * * on the bank
{{4-1-90 p.A-318}}floor in case legal or technical questions arose (Tr. 495505).
According to Mr. * * *, it was the consensus of the bank's officers and directors remaining after the arrest of Mr. * * * and Mr. * * * that if any run were to materialize, it would occur on the days immediately after July 13 on July 14, 15, or 16, or the first few days of the next week, July 18, 19, or 20 (Tr. 500-01). In the following days, Mr. * * * did not perceive any significant amount of withdrawals and based on his observation, there was no run on the bank (Tr. 507; 524). Although Mr. * * * contended that he was still a member of the board of the bank "officially," he testified that * * * contended that he was suspended or removed because of failure to fill out a proper financial statement and submit to an examination by the State Commissioner of Financial Institutions (Tr. 522-25). Mr. * * * is a personal friend of Mr. * * * and of Mr. * * * and opposed their ouster as bank officers and directors by the bank after their indictment (Tr. 526-28; 538-42).
Mr. * * *, a consulting economist who holds an M.B.A. degree from New York University, testified that he had completed the requirements for a doctorate in 1953, except for "the orals and the dissertation," that he specialized in the banking industry, particularly in preparing applications, groundwork, and materials for new banks to go into business (Tr. 755-58), that he was a consultant to many large banks, that he had testified in many administrative hearings relating to banks, and that he authored freelance columns on business and other matters (Tr. 758-65). Mr. * * * helped organize the * * * bank. Under questioning by FDIC counsel, however, he stated that for "the last four or five years I have been involved in national politics and I have not been actively involved in the organization of banks" (Tr. 797).
Mr. * * * testified that participation in the affairs of the * * * bank by Mr. * * * would not pose a threat to the interests of the bank's depositors or threaten to impair public confidence in the bank (Tr. 768-69). However, Mr. * * * did not believe Mr. * * * should function as an officer or director "until he clears himself of the problems in which he finds himself" (Tr. 769). Mr. * * * testified that, if Mr. * * * voted his stock, "it probably would be done in front of a handful of shareholders," that he could not "see Mr. * * * influencing a large body of shareholders to move in his direction," that the percentage of shareholders who attend stockholders meetings is "miniscule," that "shareholders as a whole really don't care," and that the public as a whole "could care less" (Tr. 769-72; 805).
Mr. * * * questioned the validity of FDIC Ex. 12, prepared by Mr. * * *, the current president of the * * * bank, to show any significant runoff of deposits following the indictments (Tr. 775), and was of the view that FDIC Ex. 12 proved "beyond a doubt that a run on the bank did not occur" (Tr. 776).
With respect to a bank's growth, Mr. * * * believed that a well-managed bank with an initial capital of three million dollars would grow within three years to fifteen million (FDIC Ex. 17 and 18). A bank with no appreciable growth during its second year of operation would not be typical in Mr. * * *'s view (Tr. 804-05). Mr. * * * agreed that a 7 percent share of stock could be combined with the holdings of other shareholders and that, if an individual owning 7 percent of the stock got another 3 percent to go with him, Mr. * * * "would keep an eye on him" (Tr. 808), but he maintained his opinion that Mr. * * * should be permitted to vote his stock and that such voting would not impair the credibility of the bank in the market place (Tr. 813-14). On direct examination, Mr. * * * attributed the lack of growth of the * * * bank following the indictments to the management of the bank and contending factions, but on cross-examination by counsel for the FDIC agreed that the effect of the indictments was the main factor (Tr. 814-16; 817-22). Mr. * * * testified "I would think there would be two factors. No. 1 is the return of the indictments. You can't wash that away. That certainly was, from what I hear, a sensational story in this area. Secondly, it would also lead me to suspect that the management lacks the aggressive ability to obtain deposits in the market place. I would take a look at the present management in terms of bringing in deposits" (Tr. 814).
Mr. * * * testified in rebuttal and questioned the reliability of FDIC Ex. 12, which allegedly showed a substantial runoff of * * * bank funds following the indictments.

There is no doubt that the IRS execution of a search warrant against * * * bank on the evening of July 13, 1983, and the ensuing indictments, created an immediate crisis for the bank and also created longer term problems, particularly litigation relating to stockholder control and contentions over management. A great deal of newspaper publicity resulted from the IRS action and the arrest and temporary incarceration of the bank's chairman of the board, the chief executive officer, Mr. * * * and Mr. * * *, the bank's cashier, and the indictments of those persons and the bank itself.
Notwithstanding these dramatic events, a major run on the bank did not occur. A number of factors, described in detail by Mr. * * * and also contained generally in the record, seem to have combined to prevent such a run.
The Financial Institutions Division of the State of * * * was on top of the situation and took immediate measures to reassure the public and larger depositors by press release and the stationing of state representatives in the bank the very next morning on July 14, following the IRS action the night before. Their function was to calm any depositors seeking to withdraw funds. Also action was taken to station bank officers or directors in the bank lobby for the same purpose. Publicity was given to reassure the public that Mr. * * * and Mr. * * * were no longer part of the management of * * * bank (Tr. 203). The FDIC immediately sent examiners into the bank to determine its condition and liquidity. In the background, of course, was the fact that all deposits up to $100,000 were insured by the FDIC.
If no run on the bank in the classic sense did occur, the evidence does disclose a substantial withdrawal or runoff of deposits due to the IRS action the evening of July 13, 1983, the indictments, and publicity. Depositors did withdraw funds and it is highly probable that deposits were not made in the * * * bank which otherwise would have been made. Bank operations were temporarily disrupted. The records of the Deputy Administrator of the Financial Institutions Division of * * * showing daily deposit totals (FDIC Ex. 20 1 reveal a substantial decrease in total deposits in the three (3) working days immediately following the indictments:

Total Deposits

7-13-83 (Wednesday)

$9,792,503

7-14-83 (Thursday)

$9,235,108

7-15-83 (Friday)

$8,639,083

7-18-83 (Monday)

$7,861,985

This is a decline in deposits of $1.9 million in three days, almost 20 percent of the * * * bank's total deposits. The record does not reveal any other reason for this substantial decline and it is concluded that it was caused by the indictments of Mr. * * *, Mr. * * * and the bank, and the attendant bad publicity surrounding the * * * Bank.
Some recovery occurred beginning July 19, 1983, but an examination of FDIC Ex. 12 shows that much of this was brought about by the procurement of a small number of new and large deposits by special efforts of the bank's officers and directors. See, for examine, FDIC Ex. 12, p. 11, items 2004508 and 20004516; p. 13, items 70004528, 70004544, 70004579, 70004587, 70004595, 70004609, and 70004617; p. 15, items 1078 and 1075. These few deposits obtained in only three (3) days, 7/19/83 through 7/22/83, totalled $442,200.
Despite such efforts between July 19, 1983, and August 15, 1983, deposits were off a daily average of over $800,000 from what they were on July 13, 1983.
Although it may be argued that the lowered total deposit figures toward the end of July 1983 and in the first half of August 1983, were due to new and, according to Mr. * * * and his counsel, inexperienced management of the * * * bank, such a contention does not explain the substantial drop of about $1.9 million in deposits in the three days immediately following the IRS action of July 13, 1983, the arrest, and the indictments.
FDIC staff contends that Ex. 12 shows a runoff of very substantial volume of deposits from the * * * bank during the period July 13 through October 13, 1983. This exhibit, as described, was prepared by the current president of the * * * bank at the1 FDIC Ex. 20 consists of a tabulation and a number of "Daily Report" sheets. The date shown on each Daily Report sheet is the date of preparation, and the "totals shown are the totals for the previous banking day" (FDIC Ex. 20, p. 2).{{4-1-90 p.A-320}}
request of counsel for the FDIC. It lists checking accounts closed and reduced, savings accounts closed and decreased, certificates of deposit closed early and allegedly not renewed, checking accounts opened, regular savings and new accounts, and new certificates of deposit.
According to this exhibit, during the three months following the indictments, there was a total runoff of deposits amounting to $2,016,888, and this drop in deposits was compensated for by "additional balances received from existing customers loyal to officers & directors" (FDIC Ex, 12, pp. 1 and 2).
Mr. * * * testified in detail concerning FDIC Ex. 12. Referring to pp. 9 and 10 of FDIC Ex. 12 where certificates of deposit are reported to have been closed and not renewed, and to pp. 15 and 16 where new certificates of deposit were obtained, he stated that 80 percent of the allegedly closed certificates went back into the bank in the form of new certificates (Tr. 663). Mr. * * * took up a number of these items closed and opened, and pointed out that they appeared to amount to the same funds, leading to the inference that the money represented by certificates listed as not renewed on FDIC Ex. 12, pp. 9 and 10, was often reinvested in new certificates of the * * * bank listed on pp. 15-16 of FDIC Ex. 12.
In many instances, the situation shown by FDIC Ex. 12 cannot be determined with certainty because no dates are given on pp. 910 for early withdrawal or nonrenewal of the certificates. For example, money from a certificate of deposit for $23,000 under the name "* * *," account 1035, listed as not renewed during the period July 13 to October 13, 1983, appeared to have been used on July 14, 1983, to buy a certificate in the amount of $18,000 by the same "* * *," account 1072 on p. 15. This particular instance seems quite clear. "* * *" apparently cashed her certificate for $23,000, kept $5,000, and bought a new certificate in the amount of $18,000 on July 14, 1983. FDIC Ex. 12, p. 9, lists a certificate for $30,000 under the name "* * *," account 1042, as not renewed. No date of the nonrenewal is given. On p. 15, a certificate in the same dollar amount of $30,000 and under the same name "* * *," is listed as purchased on "8/16/83." It appears highly likely, or at least possible, that the certificate for $30,000 listed as purchased 8/16/83 was purchased with the funds from the certificate for $30,000 listed as not renewed on p. 9. There is an entry on FDIC Ex. 12, p. 6, account 7004854, amounting to $501,657, which was removed during this period, which may have been an escrow account and its withdrawal not part of any runoff (* * *, Tr. 780). There are a large number of similar entries contained in FDIC Ex. 12 (see Tr. 678-728) creating serious doubt as to the reliability of the figures shown on Ex. 12, p. 1, under "significant runoff."
Nonetheless, even if allowances are made for inaccuracies in Ex. 12, the exhibit still seems to show a significant drop-off in deposits in the three months from July 13 to October 13, 1983 (Tr. 712), and the obtaining of compensating funds by officers and directors who succeeded Mr. * * * and Mr. * * * in the management of the * * * bank (Tr. 440-54).
Also, the * * * bank resorted to "brokered funds" during this period. FDIC Ex. 12 shows the deposit on 9/30/83 and 10/6/83 of $200,000 of "brokered funds" (Tr. 692-93), which are deposits obtained through money brokers by banks which "typically have liquidity problems" (Tr. 457). Brokered funds are easily obtained, but costly to the bank (Tr. 693; see Tr. 805).
The undersigned concludes that there was a substantial withdrawal of deposits in the three days following the IRS incursion into the bank on the evening of July 13, 1983. Furthermore, it seems evident that there must have been deposits not received by the * * * bank during these days which otherwise would have been made. The withdrawal of deposits and the probable loss of deposits were brought about by an impairment of public confidence in the bank caused by the events described herein, including the indictment of Mr. * * *. The undersigned further concludes that there was a more general dropoff in deposits in the * * * bank during the three-month period following July 13, 1983 (FDIC Ex. 20 and FDIC Ex. 12). The cause of this more general dropoff cannot be ascribed with certainty entirely to the IRS operation of July 13, the indictments, and the bad publicity surrounding the bank. The undersigned concludes that this three-month dropoff was caused partly by a loss of depositor and public confidence in the * * * bank resulting from the indictments, including that of Mr. * * *, and partly by the disruption in banking operations caused by the events of
{{4-1-90 p.A-321}}July 13 and their aftermath and the advent of new bank management following the ouster of Mr. * * * and Mr. * * *.
The publicity which followed the execution of a search warrant by the IRS on the * * * bank on the evening of July 13, 1983, and the arrests and indictments, was prominent in the * * * press. Mr. * * * was personally named in the Press Release issued by the U.S. Attorney for the District of * * *, and the arraignment hearing was heavily attended by the media (FDIC 1, pp. 1-2). The afternoon edition of the * * * Review-Journal, described as "* * *'s largest and most complete newspaper," identified Mr. * * *, as well as Mr. * * *, as having been arrested as the result of an undercover probe of "alleged money laundering at * * * Bank of * * *."
Publicity continued heavy, with frequent mention of Mr. * * * and Mr. * * * and reference to money laundering, reported descriptions of Mr. * * * by law enforcement officials as a "former baccarat dealer" and a "thug" who "had no banking experience before he became the president six months ago," and with other highly adverse statements being disseminated about those two individuals (FDIC 14). Newspaper stories continued intermittently during the balance of 1983 and, at the time of the trial in June and July 1984 of Mr. * * * and Mr. * * * (FDIC Ex. 11).

[.1] Mr. * * * was indicted and now has been convicted by a jury, although he is appealing this conviction, of serious Federal offenses involving dishonesty and breach of trust. The charges against Mr. * * * involve a series of alleged false and fraudulent actions, and a pattern of fraudulent conduct in violation of United States laws, and in abuse of his fiduciary position as director and chief executive officer of the * * * bank. Falsehood, the filing of false statements, the fabrication of records, and the circumvention of currency transaction regulations designed to prevent the "laundering" of money obtained from illegal or criminal activities, are precisely the kinds of alleged offenses of the gravest concern to banking regulators such as the FDIC and the Financial Institutions Division of the State of * * *. Offenses of this type threaten the integrity of banks and the banking system. They inevitably pose the potential for injury to the interests of depositors and the impairment of public confidence in the banking system.
Counsel for Mr. * * * contends that the Notice of Prohibition should be withdrawn, arguing that Mr. * * * is no longer an officer or director of the * * * bank, that he has no intention of trying to regain these positions or any position with the bank, that he only owns 7.3 percent of the stock of the bank, and that the sole issue is his right to vote his 7.3 percent ownership. Mr. * * * maintains that voting his 7.3 percent stock ownership cannot pose a threat to the interest of depositors and cannot threaten to impair public confidence in the bank. In addition to contending the 7.3 percent ownership of stock is too small to present any potential for the foregoing effects, Mr. * * * argues that is unlikely that any significant portion of the public would even know of the voting of his stock.

[.2] In the opinion of the presiding officer, these arguments are invalid. A 7.3 percent stock interest is sufficient in many cases to influence corporate action. Indeed, it appears that under the Change of Bank Control Act that ownership of 5 percent is presumptively a control amount (Tr. 790). Moreover, it is obvious, as suggested, that a 7.3 percent ownership can be combined with the ownership of other stockholders to influence or control the * * * bank, and such efforts have occurred both in 1983 and 1984 as described earlier in this recommended decision. Further, additional stock can possibly be purchased.
It is true that Mr. * * * is no longer an officer or director of the * * * bank but this situation could possibly change if the stockholder faction identified with Mr. * * * and Mr. * * * were to regain control of the bank or reach a position of strong influence.2
The argument that few stockholders attend stockholders meetings and that the public would not be aware if Mr. * * * were to vote his 7.3 percent stock interest (see, e.g., Tr. 769-72; 371-72), as applied to the * * * bank, is likewise invalid and is rejected. It may be true that as a generality (see Tr. 787) a small fraction of stockholders attends the meetings of major U.S. corporations, but there is no reason on this record to believe that that is the case with the * * * bank. The * * * bank is not2 Although the terms of the plea bargain (FDIC Ex. 7, para. 5), pursuant to which the Bank pleaded guilty to the Indictment, would seem to preclude Mr. * * * from again becoming an officer or employee of the * * * bank, the terms of a plea bargain can be changed.{{4-1-90 p.A-322}}closely held, there are a substantial number of shareholders (Tr. 649).
In view of the publicity focused in the past on Mr. * * * and the bank, it is highly likely that the voting by Mr. * * * of his 7.3 stock ownership, most probably in combination with other shareholders, not only would be known to the public, but would be the subject of more publicity in the * * * media. The record shows that there was a substantial withdrawal of deposits in the days following July 13, 1983, and it is probable that this would occur again should Mr. * * * use his stock, particularly in combination with others, in an effort to control or influence the conduct of affairs by the * * * bank.

[.3] The public must have confidence in the integrity of banks and those exercising influence in their management. Bank customers and the general public must be able to view those exercising influence in the management of banks as trustworthy, without perceived identification to crime or criminal elements. The charges of law violation, the conviction of Mr. * * * on those charges by a jury, even though that conviction is under appeal, the publicity disseminated throughout the * * * are relating to these events, including the IRS "sting" operation, all have the likelihood of causing bank customers, potential customers, and the public to associate Mr. * * * with crime and criminal activity.
In sum, the undersigned finds that a preponderance of evidence in the record as a whole establishes that there is a high degree of probability that the participation of Mr. * * * in any manner in the affairs of the * * * bank will threaten to impair public confidence in the bank and will threaten the interests of the bank's depositors.

Conclusion and Recommendation

Based on the consideration of all the evidence and the record as a whole, and all the circumstances, including the charges of conspiracy, falsehood, fabrication of records, and violation and evasion of currency transaction regulations, the undersigned concludes that participation by Mr. * * *, in any manner, in the affairs of the * * * Bank of * * *, including the voting of his 7.3 percent stock ownership, may pose a threat to the interests of the bank's depositors and may threaten to impair public confidence in the bank.
It is recommended that the Notice of Prohibition issued April 27, 1984, against Mr. * * * be continued in effect.
/s/ Daniel H. Hanscom
Presiding Officer
Former Chief Administrative Law
Judge, Federal Trade Commission